Joel Greenblatt And Ben Graham Stocks: Short Ideas In Europe

Ronan Carr, CFA of Morgan Stanley is out with a new report looking at value(less) stocks in Europe. We found three segments interesting. They are a list of short candidates using the Ben Graham formula and a second using Joel Greenblatt’s magic formula, and finally Piotroski score. Check out which European stocks pass the test below. Also make sure to check out our new post on a very similar topic – Joel Greenblatt and Ben Graham Stocks In South Korea and Value Investing: Ben Graham Stocks in India.

In March 2006 (Intelligent Investor, Chapter 14) Morgan Stanley applied to the European market the guidelines described for value investors in Benjamin Graham’s famous book (Chapter 14, Stocks for the Defensive Investor). Here they turn several of the criteria on their head to look for potential sell ideas. Criteria: market cap above US$500mn; weak earnings track record – at least 1 of last 10 years EPS <0; EPS growth <33% last 10 years; expensive valuation 1) P/E: P/3-year average EPS is >20% premium to market multiple. Expensive valuation 2) P/E x P/BV is >20% premium to market multiple. These stocks would be classified as non Ben Graham Stocks or short ideas.

Morgan Stanley has back-tested the performance of such a strategy historically. Screening annually with a 6-month holding period, absolute performance was negative in 8 of 19 years. In 12 of 20 years the average relative performance was negative.

Ben Graham Stocks

The Piotroski Score rates stocks on financial strength and profitability. Piotroski’s system is simple as it consists of nine criteria to which a stock is given one point if it passes and zero if it fails. The higher the final score, the better. Here they focus on stocks with a score of 0-2. They use a universe limited to stocks with a minimum liquidity constraint (average daily traded volume of $3.5 million). For full details see Revisiting Piotroski – A Guide to Corporate Financial Health, 6 October 2008.

The Piotroski Score rates stocks on financial strength and profitability. Piotroski’s system is simple as it consists of nine criteria to which a stock is given one point if it passes and zero if it fails. The higher the final score, the better. Here Morgan focuses on stocks with a score of 0-2.

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